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UDROP: A Small Contribution to the International Financial Architecture

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  • W.H. Buiter
  • A Sibert

Abstract

The purpose of the UDROP proposal is to prevent debt rollover crises for foreign-currency-enominated debt instruments. For such liabilities, there is no international analogue to the domestic lender of last resort or to domestic deposit insurance. UDROP stands for Universal Debt Rollover Option with a Penalty. Our proposal is that all foreign currency liabilities should have a rollover option attached to them. The 'pure' version of the option would entitle the borrower to extend or roll over his performing debt at maturity for a specified period. The pricing of the option would be left to the contracting parties. A number of variants on the basic version are also considered. These make the individual borrower's ability to exercise his option contingent on the prior declaration of a state of 'disorderly markets', by the national central bank, the International Monetary Fund or an indicator of 'disorderly markets'. All versions of the scheme have the property that no commitment of public money is required, either by national governments or by international agencies such as the International Monetary Fund or the World Bank. The UDROP proposal is rule based and general: it is mandatory for all foreign-currency debt and automatic. That is, it is exercised at the discretion of the borrower. This stands in sharp contrast to the current practice of discretionary and politicised refinancing arrangements cobbled together in an ad-hoc manner on a case-by-case basis by the International Monetary Fund. UDROP is market-oriented: the terms and conditions on any foreign-currency loan and associated rollover option would be negotiated by the lenders and borrowers.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0425.

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Date of creation: May 1999
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Handle: RePEc:cep:cepdps:dp0425

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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  1. Barry Eichengreen & Andrew K. Rose, 1998. "Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises," NBER Working Papers 6370, National Bureau of Economic Research, Inc.
  2. Reuven Glick & Andrew K. Rose, 1998. "Contagion and Trade: Why Are Currency Crises Regional?," NBER Working Papers 6806, National Bureau of Economic Research, Inc.
  3. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
  4. Harold L. Cole & Timothy J. Kehoe, 1996. "A self-fulfilling model of Mexico's 1994-95 debt crisis," Staff Report 210, Federal Reserve Bank of Minneapolis.
  5. Loisel, Olivier & Martin, Philippe, 2001. "Coordination, cooperation, contagion and currency crises," Journal of International Economics, Elsevier, vol. 53(2), pages 399-419, April.
  6. Cole, Harold L. & Kehoe, Timothy J., 1996. "A self-fulfilling model of Mexico's 1994-1995 debt crisis," Journal of International Economics, Elsevier, vol. 41(3-4), pages 309-330, November.
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Cited by:
  1. Prasanna Gai & Hyun Song Shin, 2003. "Debt maturity structure with pre-emptive creditors," Bank of England working papers 201, Bank of England.
  2. Jeffrey A. Frankel & Nouriel Roubini, 2001. "The Role of Industrial Country Policies in Emerging Market Crises," NBER Working Papers 8634, National Bureau of Economic Research, Inc.
  3. Ricardo Hausmann & Eduardo Fernández-Arias, 2000. "¿Qué hay de malo con los mercados financieros internacionales?," Research Department Publications 4226, Inter-American Development Bank, Research Department.
  4. Patrick Bolton, 2003. "Toward a Statutory Approach to Sovereign Debt Restructuring," IMF Working Papers 03/13, International Monetary Fund.
  5. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
  6. Ricardo Hausmann & Eduardo Fernández-Arias, 2000. "What's Wrong with International Financial Markets?," Research Department Publications 4225, Inter-American Development Bank, Research Department.
  7. Yilmaz AKYÜZ & Andrew CORNFORD, 1999. "Capital Flows To Developing Countries And The Reform Of The International Financial System," UNCTAD Discussion Papers 143, United Nations Conference on Trade and Development.
  8. Kenneth Kletzer, 2003. "Sovereign Bond Restructuring," IMF Working Papers 03/134, International Monetary Fund.
  9. Eichengreen, Barry & Ruehl, Christoph, 2000. "The Bail-In Problem: Systematic Goals, Ad Hoc Means," CEPR Discussion Papers 2427, C.E.P.R. Discussion Papers.
  10. Luisa Lambertini, 2001. "Volatility and Sovereign Default," Boston College Working Papers in Economics 577, Boston College Department of Economics.
  11. Williamson, John, 2002. "Proposals for Curbing the Boom-Bust Cycle in the Supply of Capital to Emerging Markets," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  12. Benjamin Martin & Adrian Penalver, 2003. "The effect of payments standstills on yields and the maturity structure of international debt," Bank of England working papers 184, Bank of England.
  13. Olivier Jeanne, 2004. "Debt Maturity and the International Financial Architecture," IMF Working Papers 04/137, International Monetary Fund.

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